Bankrolling a better world

ByRobert S. McNamaraOctober 2, 1980

It is shocking to reflect that in spite of the progress of the past quarter century and the advances that are likely in the next two decades, it is probable that at the end of this century 600 million human beings in the developing countries will continue to live in absolute poverty.

Clearly, there will be an immense intellectual and technical effort required from the bank in the 1980s -- in addition to its financial contribution -- if it is effectively to assist the developing countries to address their fundamental social and economic problems.

The sharp new rise in oil prices has more than doubled these countries' cost of imported energy, and the continuing recession in the industrialized nations will seriously limit demand for their exports.

As a result, their current account deficits have increased rapidly, and now constitute an average 4 percent of their gross national product -- and for many countries substantially more. Though they can continue to finance these deficits in the short term by additional external borrowing, in the longer term their mounting debt service would become unsupportable. The deficits must be reduced. What is needed are fundamental structural adjustments in their economies.

If these difficult changes are undertaken soon, and can be completed over the next five to eight years, growth rates in the oil-importing developing countries should recover to more satisfactory levels during the second half of the decade.

One of the most important actions the oil- importing developing countries can take to moderate its damaging effects is to adopt efficient import substitution policies in energy.

At present and prospective oil prices, many of these countries can turn what were previously regarded as marginal energy reserves of oil, gas, coal, hydroelectric, and forest resources into profitable investments. This will require their mobilizing additional domestic and external finance, but would permit them by the end of the decade to reduce their annual oil-import bill -- projected by then to amount to some $230 billion -- by more than $50 billion.

The current global economic situation has imposed particularly severe penalties on the poorest developing countries. They desperately need additional Official Development Assistance to get through the adjustment period. But total ODA flows declined in real terms from 1977 through 1979, and that portion of the flows allocated to the poorest countries was shockingly small in both relative and absolute amounts.

Both the OECD nations, and the capital- surplus members of OPEC, should now consider what measures they can take to increase concessional assistance to the poorest nations who continue to be damaged by a global economic situation they neither caused, nor can do much to influence.

The middle-income developing countries will continue to depend on external capital flows from commercial banks throughout the decade, though it is questionable whether the volume will be sufficient from these sources to meet the additional requirements imposed by the new adjustment difficulties.

If the task of recycling to the developing countries a portion of the more than $100 billion a year of additional surpluses now being earned by the oil-exporting countries is to be tackled in the 1980s efficiently and equitably, there is no doubt that the financial intermediation of the World Bank, and other international institutions, should increase substantially above previously planned levels.

During the 1980s the bank should:

* Increase its lending program in order to offset fully the higher-than-anticipated inflation levels;

* Finance structural adjustment, but not at the cost of reducing the development finance already planned for the oil-importing developing countries;

* Assist in financing the expanded energy development program called for at the Venice economic summit meeting, but not at the cost of cutting its assistance to other vital programs; and

* Respond to the development needs of China, but not at the cost of its other borrowers.

All of this can be done -- and in a manner that takes full account of the current budgetary constraints faced by the governments of the developed nations -- provided we make full use of the potential of the bank's capital base, and facilitate the use of the large private resources available for sound investment opportunities.